Institutional Equities - Online Share Trading

Institutional Equities
Exhibit 16: ABC expressway
RoE trend of BOT projects
Infrastructure projects are capital intensive, highly leveraged, have a long gestation period and a low operating
cost. Therefore, in the initial phase, post commercial operation capacity charges (depreciation and interest
costs) are higher, which suppresses margins and thereby the return ratios. However, infrastructure projects
generally have a predictable cash flow, long-term inflation-linked income stream and a low loan default rate
and therefore we look at the returns generated by the project in terms of equity IRR and value in terms of
DCF.
Case study
We have analysed here a BOT road project costing Rs12.9bn having a concession period of 15 years. We
have assumed traffic growth of 5% and interest rate of 11% per annum. Based on our analysis, we have seen
that in the initial five years the company’s returns ratio was low, but the next five years’ returns ratio was high.
Hence, earnings-based valuation will not give the right valuation for its assets. We think the DCF model is the
best way to value BOT assets, as it takes into account long-term free cash flows after factoring in capex
phasing, debt repayment and working capital requirement. BOT projects have a predicable future cash flow
and a definite concession period, giving a fixed valuation horizon and also there is no need to assume longterm
growth rate.
ABC Expressway
Length of the highway (km) 206
Total project cost (Rsmn) 12,920
Equity (Rsmn) 3,230
Debt (Rsmn) 9,690
Total 12,920
Concession period (Year) 15
Traffic growth rate (%) 5%
Interest rate on term loans (%) 11%
Discounting rate for FCFE (%) 15%
Exhibit 17: Project RoE, RoCE trend
(%)
30
25
20
15
10
5
0
(Yr)
Low return ratio
High return ratio11
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
RoE (%) RoCE (%)
Source: Nirmal Bang Institutional Equities Research
Exhibit 18: Infrastructure companies’ RoCE trend
Source: Nirmal Bang Institutional Equities Research
Exhibit 19: Infrastructure companies’ RoE trend
(%)
16
(%)
25
14
12
10
8
6
4
2
0
FY08 FY09 FY10 FY11 FY12E FY13E
IRB Infra Reliance Infra GMR Infra HCC IVRCL
20
15
10
5
0
(5)
(10)
(15)
FY08 FY09 FY10 FY11 FY12E FY13E
Loss reported due to higher
capacity charges
IRB Infra Reliance Infra GMR Infra HCC IVRCL
Source: Company, Nirmal Bang Institutional Equities Research
Source: Company, Nirmal Bang Institutional Equities Research
9 Infrastructure Sector